Exclusion zone around final salary schemes could open legal fissures

Employers that exclude new recruits from final salary pension schemes and offer inferior schemes instead could be sitting on a legal ‘volcano’, experts have warned.

The number of companies offering defined benefit (DB) schemes to new members has dropped from five million in 1995 to 1.5 million today as businesses try to limit their liabilities.

The present deficit faced by FTSE 100 companies with DB schemes stood at 66bn in January, according to the Watson Wyatt consultancy.

Many companies now offer defined contribution schemes, particularly to new staff, whereby the employee bears most of the investment risk, rather than the employer. But this attempt to cut costs could inadvertently open companies up to the risk of discrimination claims from new staff, according to Adair Turner, head of the Pensions Commission.

He said that keeping one group of people in a superior scheme – known as grandfathering – while offering different terms to another group created “huge inequalities”.

“[Claims] might come in the form of sex discrimination – for example, where women can show they are not in the same scheme as men,” Turner told delegates at a Work Foundation pensions conference last week.

“I am against grandfathering – it’s a deep injustice masquerading as justice,” he said. “It would be much better to keep the scheme, but adjust the terms for everyone.”

Will Hutton, chief executive of the Work Foundation, said the only things preventing a major outcry were inertia and incomprehension among the public about what different pension schemes meant. “It’s a volcano waiting to explode,” he said.

Duncan Buchanan, partner at McGregors law firm, said it would not be long before someone brought a claim saying there are more men in better schemes.

“If someone is successful in one of these claims, it will affect the whole organisation,” he said.